Property investment slides

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Property investment seminar presented by Green Taylor Partners January 2011
www.greentaylor.com.au
http://facebook.com/greentaylorpartners

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Property investment slides

  1. 1. Property Investment Presented by Chris Foster & Peter Cramer 43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  2. 2. Disclaimer <ul><li>The information contained in this presentation is for informational purposes only and is not intended to be exhaustive or complete. This information does NOT constitute financial advice and should NOT serve as the basis for any decision by you. The information does not take into account the objectives and circumstances of the individual investor and we recommend that you consult a financial adviser should you have questions regarding the information contained in this presentation. </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  3. 3. Introduction – Chris Foster <ul><li>Investing in property for 29 years </li></ul><ul><li>First property purchased at 23 years of age </li></ul><ul><li>Initial focus on Horsham property </li></ul><ul><li>Major focus now residential within 10km radius of Melbourne </li></ul><ul><li>CBD </li></ul><ul><li>Parents were influential – they were property investors in </li></ul><ul><li>Horsham </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  4. 4. Introduction – Peter Cramer <ul><li>Investing in property for 29 years </li></ul><ul><li>First property purchased at 24 years of age </li></ul><ul><li>Bought locally first, as was easiest and most comfortable </li></ul><ul><li>Focus now on large CBD property and growth areas </li></ul><ul><li>Did the sums, saw the opportunity in property, and jumped in! </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  5. 5. Why invest at all? <ul><li>Create financial freedom in future – so that at some time in the future, you have an option not to work. </li></ul><ul><li>Also, to provide a sense of achievement, security and a secondary interest. </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  6. 6. Investment options <ul><li>Cash / Term Deposits / Bonds </li></ul><ul><li>Shares </li></ul><ul><li>Property </li></ul><ul><li>Our focus tonight will be on property … </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  7. 7. Classes of Property Investment <ul><li>Residential </li></ul><ul><li>Commercial – retail / industrial </li></ul><ul><li>Rural – farm land </li></ul><ul><li>Timeshare is not a property investment </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  8. 8. Commercial Property <ul><li>Generally require deposit (or additional equity) of at least </li></ul><ul><li>30% of purchase price </li></ul><ul><li>Leases tend to be much longer – anything from 3 - 20 years </li></ul><ul><li>Quite often secured by bank guarantees, which makes them a </li></ul><ul><li>secure investment </li></ul><ul><li>Rent is reviewed annually and is usually increased either by </li></ul><ul><li>the CPI or by fixed % </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  9. 9. Commercial Property <ul><li>Tenant generally pays outgoings e.g. rates, plate glass insurance </li></ul><ul><li>Tenants tend to maintain the property better as the look and </li></ul><ul><li>condition of the property is important to their business </li></ul><ul><li>Commercial leases also have added protection for the owner in </li></ul><ul><li>the form of make good clauses, maintenance clauses and </li></ul><ul><li>management clauses </li></ul><ul><li>The return on invested capital on commercial properties </li></ul><ul><li>ranges between 7%-10% net after all costs </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  10. 10. Commercial Property <ul><li>Security of Lease income dependant on economic conditions </li></ul><ul><li>faced by tenants </li></ul><ul><li>Interest rates on loans are generally higher than for residential </li></ul><ul><li>property (higher risk for Bank lenders) </li></ul><ul><li>Lenders are much stricter on borrowing criteria for commercial </li></ul><ul><li>properties </li></ul><ul><li>You may have to pay GST on purchase (although this may be </li></ul><ul><li>able to be claimed back) </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  11. 11. Commercial Property <ul><li>The commercial property market can be less predictable than </li></ul><ul><li>the residential market </li></ul><ul><li>It can take time to find a new commercial tenant </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  12. 12. Residential – where most investors start <ul><li>Requires a smaller deposit – important if this is your first </li></ul><ul><li>investment property </li></ul><ul><li>Depending on your credit history, income and amount of security </li></ul><ul><li>offered you may be able to borrow up to 100% of the purchase </li></ul><ul><li>price </li></ul><ul><li>Rates on residential mortgages also tend to be lower </li></ul><ul><li>Properties tend to double in value around 10 years (history tells </li></ul><ul><li>us) </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  13. 13. Residential – where most investors start <ul><li>Leases are shorter than commercial ones – typically 12 </li></ul><ul><li>months </li></ul><ul><li>Residential properties are generally easier to let – less time </li></ul><ul><li>vacant between tenants </li></ul><ul><li>Landlord pays all outgoings relating to ownership e.g. council </li></ul><ul><li>rates, repairs, water rates (connections) etc. </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  14. 14. How to invest in property <ul><li>Managed (through listed / unlisted property trusts) </li></ul><ul><li>Direct (you are in control) </li></ul><ul><li>This session will focus on direct property investment… </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  15. 15. Tips when searching for property <ul><li>Establish clear goals – property investment strategy will be part </li></ul><ul><li>of your overall goals in life </li></ul><ul><li>Research, Research, Research </li></ul><ul><li>Read books – e.g. Jan Somers, Margaret Lomas etc. </li></ul><ul><li>Read magazines e.g. Australian Property Investor </li></ul><ul><li>Subscribe to services – e.g. hotspotting.com.au, jenman.com.au, </li></ul><ul><li>realestate.com.au, google searches, domain.com.au </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  16. 16. Tips when searching for property <ul><li>Consider use of buyers advocate service if unsure of your </li></ul><ul><li>market research </li></ul><ul><li>Monitor auction sales results with expected price ranges </li></ul><ul><li>Speak to agents in area of interest (Note: Agents are acting for </li></ul><ul><li>the vendor, not for you) </li></ul><ul><li>Be aware! In many cases, how well a property investment will </li></ul><ul><li>perform will depend on what you have paid for it. If you pay </li></ul><ul><li>too much at the start, you are already behind. Proper research </li></ul><ul><li>should avoid this mistake. </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  17. 17. Tips when searching for property <ul><li>Beware of quoted median house price movements </li></ul><ul><li>Use your head, not your heart. Don’t necessarily be governed by your </li></ul><ul><li>own personal preferences </li></ul><ul><li>Are you a speculator or investor? Property investment generally is for </li></ul><ul><li>the long term. If you sell ‘early’, you may not realise the full potential of </li></ul><ul><li>your Investment – transaction costs i.e. stamp duty and selling </li></ul><ul><li>commissions can be substantial </li></ul><ul><li>Prudent investors will ensure that building/pest inspections are </li></ul><ul><li>undertaken before any offer is made or conditional in contract. If </li></ul><ul><li>auction, generally you will need the report before going to auction </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  18. 18. Tips when searching for property <ul><li>Assess size of land component – generally land goes up in </li></ul><ul><li>value not buildings – research!!! </li></ul><ul><li>Properties near schools or public transport can tend to attract </li></ul><ul><li>a premium (although not necessarily relevant in country </li></ul><ul><li>areas) – research should identify this </li></ul><ul><li>Look for Population growth/infrastructure investment </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  19. 19. Tips when searching for property <ul><li>Cash flow is king – you need to ensure that </li></ul><ul><li>you can survive financially with your property </li></ul><ul><li>investment program, particularly if you are </li></ul><ul><li>negatively geared </li></ul><ul><li>Take your time!!! Proper research and </li></ul><ul><li>selection might take months </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  20. 20. Beware of Property Spruikers <ul><li>The following may be signs of a great deal that is not so great: </li></ul><ul><ul><li>Properties offered at wholesale prices </li></ul></ul><ul><ul><li>Seminar hype </li></ul></ul><ul><ul><li>Terms like “tax savings”, “retire early”, or “in house consultations” </li></ul></ul><ul><ul><li>Pictures of Ferraris and luxury homes </li></ul></ul><ul><ul><li>Pressure to sign up or you’ll miss out </li></ul></ul><ul><ul><li>Free flights and accommodation </li></ul></ul><ul><ul><li>One stop shop for legal/conveyanceing, valuations, finance and tax preparation </li></ul></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  21. 21. Beware of Property Spruikers <ul><li>2 main rules: </li></ul><ul><li>Avoid buying overpriced and inferior quality </li></ul><ul><li>property </li></ul><ul><li>Always seek an independent valuation from a </li></ul><ul><li>reputable valuer if any of the above indications </li></ul><ul><li>are present </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  22. 22. Buying off the Plan <ul><li>Pros: </li></ul><ul><ul><li>Input into final design and layout of property </li></ul></ul><ul><ul><li>Purchased at today’s price – in rising markets value may have increased by settlement </li></ul></ul><ul><ul><li>Stamp duty savings </li></ul></ul><ul><li>Cons: </li></ul><ul><ul><li>Taking a risk on the developer </li></ul></ul><ul><ul><li>No guarantee that quality of finish is as proposed </li></ul></ul><ul><ul><li>Time delay between signing contract and settlement (can be 2-3 years) </li></ul></ul><ul><ul><li>Can’t touch/feel and see it </li></ul></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  23. 23. Costs of purchasing a property <ul><li>Budget for these costs in addition to purchase price: </li></ul><ul><li>Stamp duty on purchase – this will be a major cost </li></ul><ul><li>Stamp duty rates in Victoria (varies from state to state) </li></ul>5.5% of the dutiable value More than $960,000 $2,870 plus 6% of the dutiable value in excess of $130,000 >130,000 - $960,000 $350 plus 2.4% of the dutiable value in excess of $25,000 > $25,000 - $130,000 1.4% of the dutiable value of the property $0 - $25,000 Rate Dutiable Value Range
  24. 24. Costs of purchasing a property <ul><li>SRO Stamp Duty Calculator – </li></ul><ul><li>http://www.sro.vic.gov.au/SRO/SROCalcs.nsf.transfer?OpenForm </li></ul><ul><li>Property transfer fee (govt charge) </li></ul><ul><li>Conveyancing/Solicitors fees </li></ul><ul><li>Owners corporation/body corporate fees </li></ul><ul><li>Rates adjustments </li></ul><ul><li>Property insurance (if borrowing, lender will require evidence </li></ul><ul><li>of cover on settlement) </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  25. 25. Costs of purchasing a property <ul><li>If borrowing to fund purchase, you will need to provide for </li></ul><ul><li>the following additional costs on settlement: </li></ul><ul><li>Loan Establishment fees </li></ul><ul><li>Mortgage registration fees </li></ul><ul><li>Lenders mortgage insurance (see later) </li></ul><ul><li>Valuation fees Example </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  26. 26. Lenders Mortgage Insurance <ul><li>Protects the lender in the event that you default on your loan and the balance of your loan is greater than what the lender receives from selling the property. </li></ul><ul><li>Generally required if you borrow more than 80% of what the lender considers to be the value of the property (unless additional security offered e.g. another property). </li></ul><ul><li>Usually charged as a one-off premium and is calculated on a sliding scale. That is, the greater the percentage of the property value you borrow and the more money you borrow, the higher the mortgage insurance premium payable. </li></ul><ul><li>For estimates on what your premium might be visit: </li></ul><ul><li>http://www.yourmortgage.com.au/calculators/mortgage_insurance/ </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  27. 27. Mortgage Protection Insurance <ul><li>Is a simplified life insurance product which is designed to pay off a fixed amount of money owing on a mortgage in the unfortunate event of a disability, serious illness, involuntary unemployment or death of the borrower. Available on residential and commercial properties owned by individuals as a primary home or as an investment property. </li></ul><ul><li>Covers your mortgage repayments only. </li></ul><ul><li>Will help avoid the financial strain that a major insured event can create so that you can focus on your recovery. </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  28. 28. Other Insurance <ul><li>We recommend you have Loss of Income & Death Cover/TPD </li></ul><ul><li>Insurance as basic asset protection. </li></ul><ul><li>Monthly income to replace wages </li></ul><ul><li>Lump sum payment in event of major crisis </li></ul><ul><li>If you say you can’t afford it – don’t even think of buying a </li></ul><ul><li>property! </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  29. 29. Costs of owning a property include: <ul><li>Advertising for tenants </li></ul><ul><li>Agents fees (rent commission) </li></ul><ul><li>Agents letting fees </li></ul><ul><li>Borrowing costs (bank charges) </li></ul><ul><li>Council rates </li></ul><ul><li>Insurance </li></ul><ul><li>Interest </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au <ul><li>Land Tax </li></ul><ul><li>Owners corporation (body corporate) </li></ul><ul><li>Repairs </li></ul><ul><li>Travelling expenses (inspection of </li></ul><ul><li>existing property – km’s, air fares, </li></ul><ul><li>etc) </li></ul><ul><li>Water rates </li></ul>
  30. 30. Gearing <ul><li>Gearing simply refers to the difference in costs of ownership related to the revenue the property generates where borrowing exists. </li></ul><ul><li>Negative Gearing – (most commonly associated with property investment) is where annual costs exceed annual revenue = loss. This loss is usually created by the interest payment on funds borrowed to make the purchase. In many cases, this loss will need to be funded from alternative sources of income e.g. wages, business profits etc. </li></ul><ul><li>Investor will receive a tax deduction for the negative gearing loss. </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  31. 31. Gearing <ul><li>Positive Gearing – annual revenue exceeds annual costs = profit. </li></ul><ul><li>Investor will pay tax on positive gearing profit. </li></ul><ul><li>Which is best ? </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au <ul><li>The actual after tax cost of a negative gearing loss depends on </li></ul><ul><li>your tax rate </li></ul><ul><li>The higher the tax rate, the lower the after tax loss – but it is still </li></ul><ul><li>a loss </li></ul><ul><li>The aim of the negatively geared investor is to recoup those </li></ul><ul><li>losses and more by the growth in the value of the property </li></ul>
  32. 32. Gearing <ul><li>Negative Gearing suits: </li></ul><ul><li>Investors in the higher tax brackets </li></ul><ul><li>Investors who are happy to take greater risks </li></ul><ul><li>Properties with high capital growth prospects (these properties </li></ul><ul><li>generally have a lower rent return compared to their cost) </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  33. 33. Gearing <ul><li>Positive Gearing suits: </li></ul><ul><li>Investors in lower tax brackets (incl. Super Funds) </li></ul><ul><li>Investors who are risk adverse </li></ul><ul><li>Positively geared property will generally have lower capital growth </li></ul><ul><li>prospects (these generally have a higher rent returned compared to </li></ul><ul><li>their cost) </li></ul><ul><li>Positively geared investors can generally acquire more investment </li></ul><ul><li>properties </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  34. 34. Gearing <ul><li>The Gearing Test: </li></ul><ul><li>How would you sleep at night? </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  35. 35. Risks involved in Negative Gearing <ul><li>Investment income risk </li></ul><ul><li>If the investment income is lower than expected or does not grow as </li></ul><ul><li>expected, the negative cash flow will be larger than expected and </li></ul><ul><li>continue for longer. Negative cash flow need to be covered by income </li></ul><ul><li>from other sources (usually salary/business). </li></ul><ul><li>Risk of capital loss </li></ul><ul><li>If the capital value does not grow in value as expected or reduces, and </li></ul><ul><li>the investment is sold, the proceeds may not cover the loan. The </li></ul><ul><li>remaining loan balance may need to be repaid from other assets. </li></ul><ul><li>Changes in Tax Law </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  36. 36. Risks involved in Negative Gearing <ul><li>Income risk </li></ul><ul><li>Income from other sources (generally salary or business) is </li></ul><ul><li>needed to cover living costs as well as the negative cash flow. </li></ul><ul><li>Salary or business income may be reduced if overtime, sales or </li></ul><ul><li>other bonuses are reduced or income ceases because of </li></ul><ul><li>redundancy, sickness and injury, or death of the investor or their </li></ul><ul><li>partner. Income and living costs can change following the ending </li></ul><ul><li>of a relationship, separation or divorce. Many of the risks arising </li></ul><ul><li>from a reduction in income can and should be fully covered by </li></ul><ul><li>insurance. </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  37. 37. Crucial Negative Gearing Points <ul><li>Don’t assume that you’ll make money from buying a negatively </li></ul><ul><li>geared property just by holding on for the long-term and waiting </li></ul><ul><li>for the escalator of property prices to steadily rise. </li></ul><ul><li>In times of rapidly rising prices (inflation) negative gearing works </li></ul><ul><li>great, but in times of stagnant or even falling prices then </li></ul><ul><li>negative gearing is a poor strategy. </li></ul><ul><li>Do your research!!! If you pay too much, negative gearing will </li></ul><ul><li>magnify your risk. </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  38. 38. Crucial Negative Gearing Points <ul><li>It’s true that you won’t lose unless you sell… if you can hold on </li></ul><ul><li>for the long-term and ride out any bumps then you should do </li></ul><ul><li>well because property prices generally trend upwards (meaning </li></ul><ul><li>that the average property will increase in price over time). </li></ul><ul><li>The real losers are investors who buy in the boom and have to </li></ul><ul><li>sell in the gloom because they can’t afford to ride out the storm. </li></ul><ul><li>Through clever investing and understanding the benefits of negative </li></ul><ul><li>gearing, you can generate wealth using savings within the investment </li></ul><ul><li>property market in Australia. </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  39. 39. Taxation Position <ul><li>Income from rental is taxable </li></ul><ul><li>Some expenses are tax deductable, some are written off over </li></ul><ul><li>time and some add to the cost base </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  40. 40. Taxation Position   Advertising – tenants   but only % relating to income replacement Mortgage Protection Insurance   over 5 years if > $100 Valuation fees (mortgage)   over 5 years if > $100 Lenders mortgage insurance   over 5 years if > $100 Mortgage registration fees  <ul><li>over 5 years if >$100 </li></ul>Loan establishment fees   Owners corporation (sinking Fund)   Owners corporation (Body Corporate)   Property Transfer Fee   Purchase Stamp Duty   Price Purchase Add to Cost Base Tax Deduction Description
  41. 41. Taxation Position ****1 – Initial repairs will be eligible for capital allowance (depreciation) ****2 – Improvements will be eligible for capital allowance (depreciation)   Water Rates   Travel Expenses – inspections   Improvements ****2   Repairs ****1   Quantity Surveyors Fees   Land Tax   Loan Payments - Principal   Loan Payments – Interest   Insurance   Council Rates   Bank Charges (on going)   Agents Fees – management   Agents Fees – letting Add to Cost Base Tax Deduction Description
  42. 42. Depreciation & Building Allowances <ul><li>Property fixtures and fittings are treated as plant, and a deduction for </li></ul><ul><li>depreciation is allowed, based on effective life. When later sold the </li></ul><ul><li>difference between actual proceeds and the written-down value </li></ul><ul><li>becomes income or a further deduction. If purchasing a property, the </li></ul><ul><li>purchaser can make a reasonable estimate of the value of fixtures and </li></ul><ul><li>fittings given their age and condition. </li></ul><ul><li>Capital works (building or major additions, constructed after </li></ul><ul><li>20/07/1982 for commercial properties and 18/07/1985 for residential </li></ul><ul><li>properties) receive a 2.5% per annum capital works deduction (or 4% </li></ul><ul><li>in certain circumstances). </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  43. 43. Depreciation & Building Allowances <ul><li>Claims are based on original construction cost, not what you may have </li></ul><ul><li>paid for the property. </li></ul><ul><li>The percentage is on the initial construction costs until exhausted. The </li></ul><ul><li>investor’s cost base for capital gains tax purposes is reduced by the </li></ul><ul><li>amount claimed for assets constructed after 13 th May 1997. </li></ul><ul><li>The vendor is normally required to provide details of the original </li></ul><ul><li>construction cost and date within 6 months after the end of the financial </li></ul><ul><li>year of your purchase. Our experience indicates that this is not normally </li></ul><ul><li>forthcoming. In this event, a Quantity Surveyors Reports will be required. </li></ul><ul><li>This costs around $500 - $600 and is tax deductable. </li></ul><ul><li>The tax deductions identified in these reports can be substantial. </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  44. 44. Reducing PAYG (Wages Tax) <ul><li>Can apply to ATO to have wages tax reduced </li></ul><ul><li>Get tax advantage of rental loss each pay </li></ul><ul><li>Assists in meeting cash flow costs of rented property </li></ul><ul><li>Must complete a “PAYG Withholding Variation Form” </li></ul><ul><li>Allow some weeks for ATO to process </li></ul><ul><li>ATO then authorises Employer to withhold less tax </li></ul><ul><li>Note: timing difference only </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  45. 45. <ul><li>Let us now look specifically at some mechanics of property investment … </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  46. 46. Holiday Property <ul><li>Holiday properties have a different cost structure: </li></ul><ul><li>Same costs to purchase the property </li></ul><ul><li>Different running costs: </li></ul><ul><ul><li>High value short term peak rentals (e.g. summer rates on the coast) </li></ul></ul><ul><ul><li>A large number of weeks vacant </li></ul></ul><ul><ul><li>High commissions to Agents </li></ul></ul><ul><ul><li>High cleaning/laundry costs </li></ul></ul><ul><ul><li>Less overall maintenance as much less used </li></ul></ul><ul><li>Property value – demand and “uniqueness” </li></ul><ul><li>To obtain better rental income, provide something different to the hundreds </li></ul><ul><li>of other properties e.g. location, view, proximity to beach, great servicing etc. </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  47. 47. Tips for renting out your Property <ul><li>Always use a reputable property management agent – this will </li></ul><ul><li>make life easier for you! </li></ul><ul><li>Ensure that you have sufficient reserves to enable the property to be </li></ul><ul><li>adequately maintained. A well maintained property will be easier to let and </li></ul><ul><li>in most cases have less tenant turnover. </li></ul><ul><li>Organise a property inspection with your agent at least once a year. </li></ul><ul><li>Always budget for less than 100% occupancy in your assessment of viability – </li></ul><ul><li>what % will depend on condition and location. </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  48. 48. Tips for renting out your Property <ul><li>If you have good long term tenants who maintain the property </li></ul><ul><li>well, consider this in future rent increases </li></ul><ul><li>If your agent contacts you with a maintenance item, ensure </li></ul><ul><li>repair work is undertaken promptly </li></ul><ul><li>Always remember that your tenant is your customer – they are </li></ul><ul><li>not a “subclass” </li></ul><ul><li>If property is vacant, ensure lawns and surrounds are maintained. A good </li></ul><ul><li>agent should ensure this (particularly if you are absent) </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  49. 49. National Rental Affordability Scheme (HRAS) – refundable tax offset <ul><li>Designed to encourage large-scale investment in affordable housing. </li></ul><ul><li>Offers tax and cash incentives to providers of new dwellings on the condition that they are rented to low and moderate income households at 20% below market rates. </li></ul><ul><li>Offers annual incentives for a period of ten years. The incentive comprises: </li></ul><ul><ul><li>A Federal Government contribution in the form of a refundable tax offset or payment to the value of $6,000 per dwelling per year including the first year of operation of the scheme </li></ul></ul><ul><ul><li>A state or territory contribution in the form of direct financial support or an in-kind contribution to the value of at least $2,000 per dwelling per year including the first year of operation of the scheme </li></ul></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  50. 50. National Rental Affordability Scheme (HRAS) – refundable tax offset <ul><li>Payment under the scheme are not assessable for tax purposes and do not affect the cost base of the property for capital gains tax purposes. </li></ul><ul><li>The incentive will be indexed in line with the rental component of the consumer price index (CPI). </li></ul><ul><li>For more information about the national rental affordability scheme you can visit the official website at: www.fahcsia.gov.au </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  51. 51. Tax Implications of Sale of Property <ul><li>The sale of an investment property is a capital gains tax event </li></ul><ul><li>This event may result in a capital gain or loss to the investor </li></ul><ul><li>The capital gain is worked out by deducting the net proceeds of </li></ul><ul><li>the sale from the cost base of the property </li></ul><ul><li>The net proceeds are calculated as follows: </li></ul><ul><li>Sale Price per contract – Agents fees – Solicitors fees = Net Proceeds </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  52. 52. Tax Implications of Sale of Property <ul><li>The cost base of the property in simplistic terms is calculated as </li></ul><ul><li>follows: </li></ul><ul><li>Purchase Price per contract: </li></ul><ul><li>Plus Stamp duty on purchase </li></ul><ul><li>Plus Legal costs on purchase </li></ul><ul><li>Less Written down value of chattels included in initial purchase </li></ul><ul><li>Less Capital allowances claimed on construction costs </li></ul><ul><li>(if constructed after 13 th May 1987) </li></ul><ul><li>If property has been owned for longer than 12 months, a 50% discount on a </li></ul><ul><li>capital gain is available </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au
  53. 53. Capital Gains Tax Calculations $ 50,000 Capital Allowances claimed (2.5% x 10yrs x $200,000) $ 4,500 Tax WDV Chattles $ 766,000 Net Sale Proceeds -$ 2,000 Legal fees at sale -$ 32,000 Agent on sale $ 800,000 Sold for After 10 years to 01/04/2010 $ 15,000 $ 406,100     (Construction Cost $200,000) $ 1,800 Legal and other fees $ 19,300 Stamp Duty $ 15,000 $ 385,000 Property ($400,000) 01/04/2000 Chattles Cost Base
  54. 54. Capital Gains Tax Calculations $ 679,852   Net Proceeds after Tax -$ 86,148 CGT Payable (via tax return) $ 766,000 Net Sale Proceeds $ 86,148 Taxed at marginal rate (say 42.5%) $ 202,700 Taxable Capital Gain -$202,700 Less 50% Discount $ 405,400 Capital Gain $ 356,100   -$ 50,000 Less Capital Allow Offset $ 406,100 Cost Base $ 761,500 -$ 4,500 Less allocated to chattles $766,000 Sale price (net of fees)
  55. 55. <ul><li>Next Seminar … </li></ul><ul><li>Self Managed Superannuation Fund UPDATE </li></ul><ul><li>Matt Richardson & Peter Cramer present an update on legislative changes affecting your Self Managed Superannuation Fund. </li></ul><ul><li>Will include reminders on important tax strategies for your SMSF… </li></ul><ul><li>Wednesday 9 th of March 2011 at 7.00pm </li></ul>43-45 Pynsent Street PO Box 637 HORSHAM VIC 3400 P 03 5382 4761 F 03 5382 1953 E [email_address] W www.greentaylor.com.au

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